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Corporate Governance
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Corporate Governance Concept and Objectives
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Corporate Governance
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Companies Laws
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The Ministry of Corporate Affairs (MCA) is the main authority for regulating and promoting efficient, transparent and accountable form of corporate governance in the Indian corporate sector. It is constantly working towards improvement in the legislative framework and administrative set up, so as to enable easy incorporation and exit of the companies, as well as convenient compliance of regulations with transparency and accountability in corporate governance. It is primarily concerned with administration of the Companies Act, 1956 and related legislations.

1. The Companies Act, 1956 is the central legislation in India that empowers the Central Government to regulate the formation, financing, functioning and winding up of companies. It applies to whole of India and to all types of companies, whether registered under this Act or an earlier Act. It provides for the powers and responsibilities of the directors and managers, raising of capital, holding of company meetings, maintenance and audit of company accounts, powers of inspection, etc. That is, it empowers the Central Government to inspect the books of accounts of a company, to direct special audit, to order investigation into the affairs of a company and to launch prosecution for violation of the Act. These inspections are designed to find out whether the companies conduct their affairs in accordance with the provisions of the Act, whether any unfair practices prejudicial to the public interest are being resorted to by any company or a group of companies and to examine whether there is any mismanagement which may adversely affect any interest of the shareholders, creditors, employees and others.

The main objectives with which this Act has been introduced are to:- (i) help in the development of companies on healthy lines; (ii) maintain a minimum standard of good behaviour and business honesty in company promotion and management; (iii) protect the interests of the shareholders as well as the creditors; (iv) ensure fair and true disclosure of the affairs of companies in their annual published balance sheet and profit and loss accounts; (v) ensure proper standard of accounting and auditing; (vi) provide fair remuneration to management and Board of Directors as well as to company's employees; etc.

The Companies Act, 1956 has elaborate provisions relating to the Governance of Companies, which deals with management and administration of companies. It contains special provisions with respect to the accounts and audit, directors remuneration, other financial and non-financial disclosures, corporate democracy, prevention of mismanagement, etc.

Every company shall in each year, hold in addition to any other meetings, a general meeting as its annual general meeting and shall specify the meeting as such in the notices calling it; and not more than fifteen months shall elapse between the date of one annual general meeting of a company and that of the next. At each annual general meeting, every company shall appoint an auditor or auditors to hold office from the conclusion of that meeting until the conclusion of the next annual general meeting and shall, within seven days of the appointment, give intimation thereof to every auditor so appointed.

Every auditor of a company shall have a right of access at all times to the books and accounts and vouchers of the company, whether kept at the head office of the company or elsewhere, and shall be entitled to require from the officers of the company such information and explanations as the auditor may think necessary for the performance of his duties as auditor.

The auditor shall inquire:- (i) whether loans and advances made by the company on the basis of security have been properly secured and whether the terms on which they have been made are not prejudicial to the interests of the company or its members; (ii) whether transactions of the company which are represented merely by book entries are not prejudicial to the interests of the company; etc.

In the case of every company, a meeting of its Board of directors shall be held at least once in every three months and at least four such meetings shall be held in every year. Every director of a company who is in any way, whether directly or indirectly, concerned or interested in a contract or arrangement, or proposed contract or arrangement, entered into or to be entered into, by or on behalf of the company, shall disclose the nature of his concern or interest at a meeting of the Board of directors.

No director of a company shall, as a director, take any part in the discussion of, or vote on, any contract or arrangement entered into, or to be entered into, by or on behalf of the company, if he is in any way, whether directly or indirectly, concerned or interested in the contract or arrangement; nor shall his presence count for the purpose of forming a quorum at the time of any such discussion or vote; and if he does vote, his vote shall be void.

Every company shall keep one or more registers in which shall be entered separately particulars of all contracts or arrangements, including the following particulars to the extent they are applicable in each case, namely:- (i) the date of the contract or arrangement; (ii) the names of the parties thereto; (iii) the principal terms and conditions thereof; (iv) in the case of a contract or arrangement to which this Act applies, the date on which it was placed before the Board; (v) the names of the directors voting for and against the contract or arrangement and the names of those remaining neutral. Further, every company shall keep at its registered office a register of its directors, managing director, managing agent, secretaries and treasurers, manager and secretary.

The remuneration payable to the directors of a company, including any managing or whole-time director, shall be determined, either by the articles of the company, or by a resolution or, if the articles so require, by a special resolution, passed by the company in general meeting; and the remuneration payable to any such director determined as aforesaid shall be inclusive of the remuneration payable to such director for services rendered by him in any other capacity. However, any remuneration for services rendered by any such director in any other capacity shall not be so included if:- (i) the services rendered are of a professional nature; and (ii) in the opinion of the Central Government, the director possesses the requisite qualifications for the practice of the profession.

A director may receive remuneration by way of a fee for each meeting of the Board, or a committee thereof, attended by him. A director who is neither in the whole-time employment of the company nor a managing director may be paid remuneration, either by way of a monthly, quarterly or annual payment with the approval of the Central Government; or by way of commission if the company by special resolution authorises such payment. However, the remuneration paid to such director, or where there is more than one such director, to all of them together, shall not exceed:- (i) one per cent of the net profits of the company, if the company has a managing or whole-time director, a managing agent or secretaries and treasurers or a manager; (ii) three per cent of the net profits of the company, in any other case.

Every public company having paid-up capital of not less than five crores of rupees shall constitute a committee of the Board knows as 'Audit Committee' which shall consist of not less than three directors and such number of other directors as the Board may determine of which two thirds of the total number of members shall be directors, other than managing or whole-time directors. The annual report of the company shall disclose the composition of the Audit Committee. The auditors, the internal auditor, if any, and the director-in-charge of finance shall attend and participate at meetings of the Audit Committee but shall not have the right to vote.

The Audit Committee should have discussions with the auditors periodically about internal control systems, the scope of audit including the observations of the auditors and review the half-yearly and annual financial statements before submission to the Board and also ensure compliance of internal control systems. It shall have authority to investigate into any matter in relation to the items specified by the Board and for this purpose, shall have full access to information contained in the records of the company and external professional advice, if necessary. The recommendations of the Audit Committee on any matter relating to financial management, including the audit report, shall be binding on the Board. If the Board does not accept the recommendations of the Audit Committee, it shall record the reasons thereof and communicate such reasons to the shareholders.

Besides, a listed public company may, and in the case of resolutions relating to such business as the Central Government may, by notification, declare to be conducted only by postal ballot, shall, get any resolution passed by means of a postal ballot, instead of transacting the business in general meeting of the company. Where a company decides to pass any resolution by resorting to postal ballot, it shall send a notice to all the shareholders, along with a draft resolution explaining the reasons thereof, and requesting them to send their assent or dissent in writing on a postal ballot within a period of thirty days from the date of posting of the letter. If a resolution is assented to by a requisite majority of the shareholders by means of postal ballot, it shall be deemed to have been duly passed at a general meeting convened in that behalf. However, if a shareholder sends his assent or dissent in writing on a postal ballot and thereafter any person fraudulently defaces or destroys the ballot paper or declaration of identify of the shareholder, such person shall be punishable with imprisonment for a term which may extend to six months or with fine or with both.

2. In the competitive and technology driven business environment, while corporates require greater autonomy of operation and opportunity for self-regulation with optimum compliance costs, there is a need to bring about transparency through better disclosures and greater responsibility on the part of corporate owners and management for improved compliance. In response to such changing corporate climate, the Companies Act, 1956 has been amended from time to time so as to provide more transparency in corporate governance and protect the interests of small investors, depositors and debenture holders, etc.

The important step in this direction has been the Companies Bill, 2004, which has been introduced to provide the comprehensive review of the company law. It contained important provisions relating to corporate governance, like, independence of auditors, relationship of auditors with the management of company, independent directors with a view to improve the corporate governance practices in the corporate sector. It is subjected to greater flexibility and self-regulation by companies, better financial and non-financial disclosures, more efficient enforcement of law, etc.

This amendment to the Companies Act 1956 mainly focused on reforming the audit process and the board of directors. It mainly aimed at:- (i) laying down the process of appointment and qualification of auditors, (ii) prohibiting non-audit services by the auditors; (iii) prescribing compulsory rotation, at least of the Audit Partner; (iv) requiring certification of annual audited accounts by both CEO and CFO; etc. For reforming the boards, the bill included that remuneration of non-executive directors can be fixed only by shareholders and must be disclosed. A limit on the amount which can be paid would also be laid down. It is also envisaged that the directors should be imparted suitable training. However, among others, an independent director should not have substantial pecuniary interest in the company’s shares.

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